Provide three reasons why an auditor presumes that there are potential risks of fraud relating to...

Provide three reasons why an auditor presumes that there are potential risks of fraud
relating to revenue recognition in entities. Make sure that you explain your reasons
clearly.

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Expert Solution

An auditor presumes that there are potential risks of fraud relating to revenue recognition in entities. This is due to:

Overstatement of revenues

This may be due to premature revenue recognition or recording fictitious events. Revenue recognition is dependent on particular facts and circumstances relating to the revenues, there is a potential risk of material misstatement. Also, accounting principles and practices vary according to industries resulting in further chances of misstatement.

Inventory quantities

This relates to the misstatement due to fraud that affects inventory quantities. Physical inventory count may differ from reported inventory quantities. This risk is even more prevalent when the reporting period is near. For eg. a particular asset maybe highly prone to misstatement would be material to the financial statement

Management estimates

There is a potential for material misstatement due to the development of management estimates. Management's estimates affect a large number of accounts such as valuation of assets, acquisition estimates, accrued liabilities fir value of derivatives etc.

jeff jeffy answered 1 year ago

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